The CPI is an index of the prices for a "market basket of goods and services" that the Labor Department has determined are representative of typical purchases by urban consumers. One major difference between the CPI and the PPI, which we reported on yesterday, is the inclusion of price data for services and construction. Together these two components account for about 58% of the nation's economic activity. The CPI also includes information about prices of imported goods, which the PPI does not.

Food and energy prices are highly variable from month to month, and are liable to make month-to-month changes in the CPI jump around quite a bit. For this reason, economists examine how the CPI behaves when these two components are excluded. For May, the CPI minus food and energy rose 0.2 percent.

Another way to minimize the month-to-month variations in the CPI is to look at the changes in the index over a longer period of time, usually a year. For the year ending with May 1996, the CPI rose by 2.9 percent. For the same period the CPI minus food and energy rose 2.7 percent. Thus, you can see how the longer period tends to bring these two quantities closer together.

The May year-over-year change of 2.9 percent in the CPI compares with a rate of 2.5 percent in 1995 and a rate 2.7 percent in both 1994 and 1993. Since 1991 the yearly CPI change has been virtually constant, varying between 2.5 and 3.5 percent. The May reading is right in the middle of this range. May marked the 65th consecutive month of low, essentially constant, CPI growth. The last period comparable to this was 30 years ago.

Both the PPI report yesterday and today's CPI report show that inflation is under control. Now maybe the bond market will calm down and stock market participants will take notice of the increasing evidence that the economy is beginning to improve.

Byline: Lafferty (MF Merlin)